One of the great assets at the time of writing for U.K expats is that they don’t have to carry certain U.K taxes wherever they go as an expat or reside.
In fact, the only, tax that is carried worldwide for U.K residents is Inheritance Tax.
I have gone in to detail on a previous article about Inheritance Tax. Find my article on IHT for U.K expats and Trusts for more information and how to legally reduce IHT.
How Can You Reduce Your Tax Bill if I am Living Abroad?
First of all we will go over the current level of taxes in the U.K on Invests as of 2020.
| Income Tax | Income level GBP | Tax Rate |
| Personal Allowance | 12,500 | 0% |
| Basic Rate | 12,501-50,000 | 20% |
| Higher Rate | 50,001-150,000 | 40% |
| Additional Rate | Over 150,000 | 45% |
You do not get income allowance on anything over 125,000 GBP.
Capital Gains Tax
| Capital Gain tax | Level GBP | Tax rate |
| Personal Allowance | 12,300 | 0% |
| Over | 12,301+ | 10% basic rate or 20% higher rate depending on income level and rate |
You get tax relief on your residence property but this wont apply for most expats
Rate of Capital Gains Tax on Asset Classes
| Type of asset | Basic Rate Tax | Higher rate Tax |
| Shares | 10% | 20% |
| Crpto | 10% | 20% |
| Residential Property | 18% | 28% |
As a quick example Mr. H has 2.2 million and made 200,000 gains from his shares over the last 10 years. He is looking to sell his shares to pass on to his 3 grandchildren.
The tax would be:
- 200,000
- 12,300 tax free=187,700
- 10% of 1000 taxed=100=186,700
- 20% taxed of 186,699
- So 37,440 taxed
If Mr. H had only made 100,000 profit from a stock market it would work out the following
- 12,300 tax free
- 10% tax of 1000
- And the remaining taxed at 20%
- Being subject to 17,440 tax.
Dividend Tax
| Dividend Tax | Tax |
| Tax free rate | 2000 |
| Basic Rate | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.2% |
Case Studies
This works for expats, if you have an income in the U.K for many expats this includes a rental property in the U.K.
So, how does this work. This tax is not on your world wide assists and only comes into play on income from the U.K.
Scenario 1
Client A is an expat living in Canada. Working for a multinational company paying taxes at source from the company in Canada and a resident of Canada with 500,000 CAD in stocks and share portfolio that earned 10% last year (spending 6 months a year in Canada) you have a rental property in France earning 1000 Euros a month.
The U.K Tax
The tax Client A isn’t subject to the U.K income tax. You will need to pay tax in France on the property if applicable and will pay tax in Canada on the gains and income tax if not in RRSP or equivalent Canadian tax wrapper. If you were to die, the assets would be subject to U.K IHT as past the Nil rate band if it not placed in a trust or gifted 7 years prior to death.
Scenario 2
A U.K expat living and working in Singapore, they have a property in the U.K renting out in London getting gross 2,500 a month.
In investments you have 20k in your ISA from when you lived in the U.K and have an account with a major financial company worth 440,000 GBP that earned 8% last year and 3000 GBP worth of dividends.
The tax from the rental income you would be 3,500 GBP at a 20% rate with the present rate with an income taxable allowance of 12,500 GBP.
With the shares, if you were to sell them based on having 1 year in the account at 8% of 440,000 you put in 404,800 so have seen a gain of 35,200 in a fiscal year. Your capital gains tax is a 12,300 GBP and goes 10% or 20% depending on your Income level if this was the case with your current income at 30,000 GBP from your rental income and the sale of your assets it would be subject to 2,580 GBP (20,000 GBP taxed at 10% 2900 GBP at 20% and 12,300 GBP tax-free) for that year.
For the dividend tax, you have a 2000 GBP allowance and then it depends on your income rate to the tax from 7.5%-38.1%. As your income tax is 30,000 GBP from your property, the basic rate tax applies. For dividends, this means 7.5% the first 2000 GBP is free, so 1000 GBP will be taxed at 7.5% which is 75 GBP.
How Does Investing Offshore as a U.K Expat Help Reduce Taxes?
If you are offshore (or even in the U.K) you have the ability to invest anywhere you want. For example, I have a property in Thailand, I don’t have any restrictions on owning the property or buying it, and is subject to local laws if I can buy or not.
The Capital Gains Tax (CGT) that would be impacted if I sold that property within 5 years would be Thai CGT. The same goes for investments, you can invest in funds anywhere in the world (that will accept you) and pay tax as a U.K citizen in where it is domiciled. For example, I buy a fund through platform Z based in the Isle of Man, I make 30,000 GBP profit this year from the fund in platform Z.
I am living in Singapore and have residency as I spend over 6 months a year in the city state. I sell the funds with a profit of 30,000 and then deposit the funds to an offshore bank also in IOM.
As I have deposited the funds offshore and a resident outside the U.K. it would not be subject to CGT nor would it go towards my income tax.
Is it Safe to Invest Offshore?
This is the question I get most, in the U.K you have FCA regulation and an FSCS scheme that protects 85,000 for single holders if anything were to happen.
This is great, but the likelihood that this will need to come in is highly unlikely. The banking system will have to fail or you have been wrongly sold an investment in order for you to get your money back. If you choose to invest in a bad advisor and accepted the terms then they can’t do anything.
To touch on point number one, the banking system failing. It could happen, but highly unlikely as seen in 2008.
Buying a bad share with the present regulations that are enforced in the U.K is also highly unlikely. As seen with the Woodford case, you do not get the money if the fund collapses.
With a safe offshore jurisdiction, it has a lot safer banking system (judged by rating agencies) in places like Singapore, Luxembourg, and IOM while in 2020 the U.K banks rate pretty poor for a developed nation.
Furthermore, the platforms or companies are usually backed by large Custodian banks to back up if the banks do fail. In short, a lot of the places rely on finance so good banking stability is key.
The company is where you use the platform in the same way as a lot of people in the U.K have accounts with HL, however, your money is not in HL its in the funds within HL. I would like anything to make sure the company has a history and stable with AUM under management. Don’t just pick a company or fund because it looks cheap.
The funds, now this is the really important bit where most people fret about, what location should I hold a platform? For me as long as the location ticks a few boxes
- Stable banking
- Politicly stable
- Financially stable
- Good jurisdiction laws (normally coming from the U.K)
- Low taxes
- To check go and review rating agency S and P, Moody’s, Fitch.
But the funds, are the main drivers within that which keep your wealth growing so would keep an eye on these.
Offshore, you do have more unregulated funds such as Investment Trusts, however, this is not always a bad thing as allows access to smaller companies and emerging markets. This is more suitable for a sophisticated investor who understands the workings of Investment Trusts.
I would ensure like you would wherever you are getting a portfolio, to check the funds and portfolio that you are being invested in.
Make sure the funds are (for stability purposes)
- 3 or more star rated (unless going for an alternative investment)
- Has at least 100 million under management
- A track history as a company
- Fund manager record
- Proven results history over a 5-year time frame over the benchmark
I find this much more important than reviewing the locations, if they tick the required criteria above.
As shown from the case studies above you can potentially save significant amounts if you are an expat investing offshore. If you are over the present income of CGT tax levels. If you have a portfolio in the U.K and are offshore and want to review your options feel free to get in touch on the link below.
